Discussion of ‘‘On the relation between predictable
market returns and predictable analyst forecast errors’’
Gerald T. Garvey
Published online: 4 March 2008
Ó Springer Science+Business Media, LLC 2008
This paper should be inﬂuential and widely cited. It furthers our understanding of
two major issues in ﬁnancial accounting.
Most directly, the results undermine the validity of using analyst earnings
forecasts as proxies for market expectations. The paper does a thorough job of
estimating and documenting sources of analyst forecast error and shows that the
market does not share many of these errors. The relevant results are nicely
summarized in Table 6. Most strikingly, the results with revisions and past forecast
error (UE) indicate that analyst forecast errors are signiﬁcantly autocorrelated, but
this appears to be largely understood by the market.
The paper’s main results are also informative about the relative reliability of
some well-known return anomalies. Turning again to Table 6, we see that accruals
and related accounting anomalies fare rather well in that much of their return-
forecasting properties can be traced back to their ability to forecast analyst errors.
The momentum and past revision anomalies do not fare so well. Their return-
forecasting properties cannot be reconciled with their ability to forecast analyst
G. T. Garvey (&)
Barclays Global Investors, San Francisco, USA
Not all accounting-based anomalies would necessarily fare so well in the tests presented here. For
example, Shevlin, Rajgopal, and Venkatachalam (2003) Does the stock market fully appreciate the
implications of leading indicators for future earnings? Evidence from order backlog. Review of
Accounting Studies, 8(4), 461–492 ﬁnd that order backlog has no ability to predict analyst errors, but
appears negatively associated with returns.
Rev Acc Stud (2008) 13:292–294